Chinese economic forecast trimmed down

The World Bank’s Chinese economic forecast for 2014 has been reduced from 7.7% to 7.6%. The World Bank describes China’s first quarter of 2014 as a “bumpy start to the year.”

A series of disappointing statistics have come out of the world’s second-largest economy since the beginning of the year.

The World Bank added, however, that recent reforms will help China towards the path of inclusive and sustainable medium- and long-term economic growth.

In November 2013, the Chinese Communist Party set out an ambitious reform agenda, aimed at streamlining the economy over the next ten years.

Chinese economic forecast will be influenced by reforms

The reforms include significant changes to legislation in the services and financial sectors, as well as the large state-owned companies. If the reforms are implemented, most economists say that the Chinese economic forecast would be revised significantly upward.

“It is a significant policy move, indicating a political will to reduce state interventions and address government-led distortions in the economy.”

“If implemented, the reforms will have a profound impact on China’s land, labor, and capital markets, and enhance the long-term sustainability of its economic growth. Some reforms are also likely to support growth in the short term.”

Private sector needs removal of barriers

If Chinese authorities do eventually remove entry barriers, simplify approval procedures and reduce regulatory and administrative burdens, the private sector will be keener to invest more. Current monopolized sectors need to be opened up so that other players may compete.

If business taxes are consolidated to value-added tax, the total tax burden would be reduced, resulting in higher investment, the authors wrote, especially in the financial services and transportation.

Reforms will be gradual

Service sector growth would accelerate significantly if more land were made available for commercial activities. The World Bank warned “However, the reform process is likely to be gradual, with more specific follow-up implementation plans expected as the year goes on.”

The report highlights the importance of deepening reforms that redefine the relationship between the government and the market. According to announcements made by the Communist party in November, there will be stronger protections for both state- and privately-owned property rights. The role of state-owned enterprises will be “refined and more limited to sectors related to public services.”

State-owned enterprises’ declining role

State-owned enterprises (SOEs) continue playing an important, if decreasing, role in China’s economy. As of 2012, 42% of total assets were help by SOEs. As the private sector gains in importance this share is declining. SOEs’ profitability is increasingly lower than that of private companies.

(Source: World Bank)

The declining dominance of SOEs in the Chinese economy is more evident in the labor market. In 1990, SOEs had a 60% share of total employment, compared to just 18% in 2012.